Globe and Mail creates a splash

There is an article on the front page of the Globe and Mail today called Ottawa targets public service pension plan for cutbacks.

Some of the highlights of the article include: 

The generous pension plan enjoyed by federal civil servants is being targeted for possible cuts, including an end to early-retirement provisions for new hires.

... senior civil servants are also concerned that too many bureaucrats retire in their mid-50s, causing staff shortages that are set to worsen in coming years.

One of the most controversial aspects of the federal pension plan is the ability to retire with a full pension at age 55, after 30 years of service.

According to the Treasury Board, however, federal employees paid $1.2-billion into the plan in 2007-08, compared to the government's $2.6-billion share. That 32-per-cent employee contribution will go up, but only to 40 per cent by 2013.

This report is a mixture of interesting statistics and policy  recommendations about public sector pension plans. The information is gathered from the pension site of the Treasury Board. It is supplemented with information from a review done on wages in the Federal government. Although the information is not current, based on past trends the current salary base in the federal public sector is around $65,000 per year and the total compensation is close to $89,400. The average annual compensation for members in the RCMP service is estimated over $100,000 per year. Treasury Board Salary Review.


Retirement Tsunami

Canada has been aware of the demographic shocks coming from the retirement of the Baby Boomers. The PSI produced a report in 2005 called The Retirement Tsunami. In the report they stated that starting in 2007 more workers will be retiring than entering into the workplace. In 2010 they estimated that 370,000 workers will be riding off into retirement.

These numbers call into question the current retirement ages in Canada and specifically the retirement of the public sector with a much lower retirement age. The CFIB back these findings with a report called the Pension Predicament.

Fair Pensions For All

The Globe and Mail highlighted the contribution levels of taxpayers into the public sector retirement plans.

One of the key questions about the contributions is ... what is fair to all Canadians? Canadians have contributed $631 Billion into individual registered plans but $555 Billion into public sector employee plans.
NUPGE comments on Pension Assets in Canada

Canadians have access to the CPP but suffer reduced coverage by triggering their pensions early. If this is fair for taxpayers why should the public sector not play by the same rules?  Is it wise to take early CPP?

Recommendations for Fair Pensions 

1. Public sector employees should play by they same rules as all Canadians. Basic retirement is age 65. If pensions are taken early they should be reduced to the same level as taxpayers. Ie. 30% reduction for pensions at age 60 or .5% per month before age 65. (Thanks to L Rob)
   
2. Cap public sector pensions at a fair level. In the US two current electoral candidates have suggested that pensions in the public sector should be capped at $100,000 per year. 
3. Make all public sector pensions defined contribution plans. There is no reason taxpayers should be expected to fund into gold-plated defined benefit pensions when most will never have pensions near these levels. 

Action Required by All Canadians 
The Montreal Gazette recently featured a three part pension series. The last article called for all Canadians to become involved in the debate. They pointed out that Pension  Woes Wont Be Easy 'To Fix

But this is not just an issue for actuaries and civil servants. All Canadians - not just those between 60 and 65 - would help themselves by taking part in a full national discussion. The retirement you save may be your own.

All Canadians need to educated and become involved in the discussion about the future of pensions in Canada.

Disappointing Showing in Whitehorse

Many taxpayers are asking are asking "will I have enough for retirement".

In a very surprising move by the Canadian federal government came out with a report from Jack Mintz saying that there is No pension crisis. The Report on Retirement Income Adequacy looked at some of the issues surrounding retirement income security for Canadians. In the report Mintz highlighted that Canadian seniors do not suffer from poverty. Most Canadians retire with a replacement income of close to 90%. 

I contend that there is in fact a retirement crisis in Canada. It is based on taxpayers of the baby boomer generation funding platinum pensions for the public sector. The CFIB came out with a release that is calling for restored Fairness for all Canadians on pension inequity

It is unconscionable that Canadian taxpayers are on the hook for public sector pension plans when half of the Canadians working in the private sector will not even benefit from any form of retirement savings.

This call came at the same time as the CD Howe released a report that shows how large the liabilities of Canada's public sector pensions really are. The Startling Cost of Federal Government Pensions 

Enhanced Public Information
One of the complaints from the CFIB was the lack of disclosure or information about Canada's public sector pensions plans. A side benefit of the Whitehorse conference is that leading up to this meeting more information has become available about the costs of these pensions.

One of my readers, Stephen brought to my attention a Statscan release showing the value of pensions in Canada.$1.8 trillion in pension assets in Canada at the end of 2008.

This $1.8 Trillion is composed of: 

• Pension plans - $ 1,064 Billion
• Individual savings plans including RRSP's - $631 Billion
• Social Security including CPP - $140 Billion 
  

A further analyze shows that of the pension plan assets $555.7 Billion is held by public sector pension plans.Canadians taxpayers have funded far more into public sector employees pensions than they have their own plans.

The last Statscan workforce survey shows there are 16.873 million working and self-employed Canadians. There are 2.8 million public sector employees in pensions plans in Canada. This means that 17% of Canada's workforce are public sector employees with pension plans. However, they control 33% of the total retirement assets in Canada.

On an average basis each working public sector employee has retirement assets worth $198,464. On the other hand the average Canadian, including those in pension plans have retirement assets worth $81,000. Those not in in pension plans have an average RRSP account of $65,000.

Retirement Income
Statscan reports that there is a big gap in retirement income between those with pension plans and those without.

At the other end of the spectrum are seniors with employer pensions exceeding their combined C/QPP and OAS/GIS. Just one in five 69 year-olds fit this definition, and their average income was more than double that of the other 80%—$43,000 compared with $20,200

Of course what this means is that retirement will be an unfulfilled fantasy for many Canadians.

Another strategy for those who have not saved enough for a comfortable retirement is to continue working past age 65. ..Overall, just one in eight 69 year-olds relied on employment or self-employment earnings for at least a fifth of their income, and only one in twenty-five earned enough to account for more than 60% of total income (Table 6). And the income profile of these older workers suggests that many are self-employed professionals who likely do not have substantial employer pensions. 

The highlight of the report is that:
It appears that over the past 20 years taxpayers without pension plans have contributed an average of $65,000 into their retirement plans. At the same time they have contributed into public sector pension plans so that the average public sector worker has close to $200,000.

The CD Howe shows that taxpayers are on track for another additional $500 Billion of funding into public sector pension plans.   

I respectfully disagree with Jack Mintz that there is indeed a pension crisis in Canada. Please listen to the CFIB:

The inequality issue many Canadians are faced with regarding pensions is a serious disservice to the private sector because it is imposing needless barriers for the private sector to compete on a level playing field with the public sector. This is particularly harmful for small- and medium-size firms, which are the backbone of the Canadian economy. 

Some additional facts and figures:
Pension Satellite Account
Pension Plan Contributions in Canada
Pension Coverage in Canada 

Whitehorse Pension Debate

The debate in Whitehorse has centered on a fair retirement strategy for all Canadians. 

The problem with a debate on pensions is that most taxpayers will never have a pension. Any move to bolster pensions will only pour more money into plans that only benefit Canada's pension elites.

These pension elites works mainly for government. This includes all levels of government municipal, government and federal. Most will receive a pension based on 70% of their final earnings. They will receive these pensions as early as age 50. These pensions will be paid out at a level higher than their earnings for most of their career. 

Best of all these pensions are guaranteed by taxpayers, most of who have no pensions.

An excellent report in the Toronto Star highlights the problems with Canada's federal pensions. These pensions cover 1.08 million workers. There are other levels of government that offer these same defined benefit pensions. They cover another 2.3 million workers. The pensions of other levels of government are as generous as those of federal employees. However, they are even more poorly funded than the federal pensions. 

These pension shortfalls exist despite Canadian taxpayers having funneled billions and billions of dollars into these plans. How big is the liability to taxpayers for all levels of government pensions? 

Pension risks by James Daw

Ottawa owes about $198 billion more in pension promises to current and former employees than it has set aside, a paper from the C.D. Howe Institute estimates.
President William Robson and Alexandre Laurin argue the fair value of pension promises is about $58 billion higher than Ottawa has reported.
There are about 1.08 million active and retired civil servants, RCMP, Canadian Forces, Members of Parliament and judges.
Most will collect pensions longer than they worked. If public servants' benefits were calculated the way Robson and Laurin suggest, Ottawa and employees would have to set aside 34 per cent of pay.
But the government did not start setting aside any money until 2000. Until then, it treated the pension promises as debt.
That debt obligation, the authors argue, should be calculated using the investment return paid by inflation-protected, government-backed bonds, not estimated returns from a mix of investments.
"Federal pensions as currently configured are more costly than commonly understood and expose taxpayers, and potentially participants as well, to underappreciated risks," the authors argue. "Reducing or offsetting these costs and reducing these risks should be key elements of a program to restore federal finances to a sustainable position."
James Daw, Toronto Star - Younger workers face retirement shortfall

Start Pensions changes at the Top

In the UK there is a review of MP pensions being implemented. Report on cutting MPs' final salary pension scheme due

This is a good place to begin the redesign of our pension system in Canada. It is hard to get stakeholders to make changes that impact them on a personal level. High MP pensions lead to low voter confidence

In BC  the cost of pensions for MLA's hit the news. In an abusive move the MLA's gave themselves retroactive pensions. Pension that pay them on a defined benefit retroactively to 1996. The costs of these gold-plated pensions is an issue that calls into question the real leadership that BC is offering at the Whitehorse pension summit. $800,000 per Lucky MLA

The BBC report cited that costs for these types of pension is in excess of 31.6% of salary. Most of the public sector pensions in Canad have the same types of high costs associated with them. This is why so many are underwater and suffer from serious underfunding, amounting to Billions. This tab of course is picked up by taxpayers.

Part of any discussion reform in Canada needs to be the reforming of gold-plated public sector pensions. All Canadians should have access to Fair Pensions, not just the pension elite.

Heading Towards Whitehorse and a National Pension Summit

After many pension crisis and a horrible year in the worlds stock markets the debate on pensions is reaching a critical boil. The Finance Ministers in Canada are meeting on December 17 in Whitehorse for an event called the pension summit. The summit in Whitehorse will also help all policy stakeholders in Canada to solidify their positions on pensions. 

The World Bank released a report yesterday called Pensions in Crisis

Despite the severity of the crisis, it pales in comparison to the demographic crisis which the region will face and ...

even the most severe scenario of the financial crisis pales in comparison with the effects of the demographic crisis that is looming

It went on to urge:

Countries in the region not to make any policy changes focused on addressing short-term fiscal concerns that make the long-term even worse.

Future pension system deficits can be threefold than what is currently expected, and are expected to remain at that level for more than 20 years before slightly improving. Policymakers need to use the opportunity of the current crisis to address long-term issues, which could bankrupt pension systems precisely when the numbers of people who need them are growing.”

Although the report focused on parts of Europe and Asia it is applicable here in Canada as well. The changing demographic forces are perhaps even stronger and more severe in Canada. I attempted to highlight this risk in my blog called Tales from the other side of the aging catastrophe

National Summit
Most commentators on the issue feel that now is the time to clarify the future of pensions in Canada. There are many different viewpoints and stakeholders.Here are the numbers from Statscan. Registered Pension Plans in Canada

Seniors
Those currently in retirement and living on government and private sector programs have a large stake in maintaining what they have. They are represented by CARP. CARP envisions lots of pensions for everyone. They released their position in Towards a Universal Pension Plan 

Organized Labour 
Canada's labour movement has perhaps the greatest to lose as a result of any reform in this area. The unions represent mainly those employees in the public sector or at large Canadian companies. In Canada these are the only workers with gold-plated pensions. It is best summarized in a report from the CFIB called The Pension Predicament 

Independent Business 
Independent businesses are dearly affected by the pension crisis in Canada. It is here that the 11 Million Canadian without pension work. They are struggling to save for some sort of decent retirement for themselves. Theirs is  also the burden of trying to finance with tax dollars the gold-plated pensions of the pension elite. The CFIB has monitored this issue and has been a strong advocate for independent business. It is my hope that they can find a way of generating a forum for this voice to be heard. 

Pension Elites
These are Canada's public sector workers who protected by unions have gained the lions share of pensions in Canada. They pay a small contribution towards the pensions they will receive. They will retire early and be guaranteed a taxpayer funded lifetime of pension income. 
At the top of this heap are the senior mandarins of government. These are the ones who ruthlessly abuse the taxpayer for pension security. In Ontario there are over 53,000 government employees earning over $100,000 per year. This level of income guarantees them a $1 million lifetime pension.  
To see how these pension work go to the BC Pension Videos series website. These videos have provided me with lots of entertainment. The Value of your pension - Series

CD Howe 
The CD Howe Institute has been instrumental in leading a very intelligent and well balanced analysis of the pension issue in Canada. They have brought Keith Ambachtsheer the help produce a policy position currently leading the way in the pensions discussion. It is based on a Supplementary Pension (PDF) approach.

Pension Industry in Canada 
The life insurance companies and the banks in Canad provide most of the private pension coverage. It is their business and any reforms or changes to the system will put their financial position in jeopardy. They are in a delicate position and need to regain some credibility in the pension issue.  Canadians pay the highest cost in the world for the services of its banks an insurance companies. James Daw one of the foremost pension commentators in the country covers this perspective in Bankers' group wants to continue to protect you. Daw has covered the pension well. See all his articles at the Star 

Provincial Governments
At the table in the Whitehorse will be the provincial finance ministers. They have been muddling around for the past year with several expert commissions on pensions. The report from Ontario only focused on supporting the gold-plated pensions of government employees. However, the BC and Alberta commissions created the Supplementary Pension idea that is now going forward as the most popular way of reforming the Canadian pension system.
Here are the links to the Expert Commission Reports
Ontario Pension Review
Alberta and BC Getting Our Acts Together - PDF  

Canadian Media 
A very influential commentary on the pension crisis in Canada was put together by the Globe and Mail. They covered most aspects of pensions in Canada in the Retirement Lost series. I have enjoyed following the pension world through the eyes of my friend at the Pension Pulse, Leo Kolivakis.

Federal Government
To date the federal government has been quiet on the issue of pension reform. Throughout the year they have implemented a few emergency pension move but nothing major. Whitehorse will be a chance to see what is behind the curtain. The Jack Mintz Report will be released at the Finance Ministers meeting.

Candidate for Governor - Charlie Baker

Charlie Baker is running for Governor in Massachusetts. He has identified that pension reform is one of the key issues that resonates with voters.

Pension Caps
Baker said today he wants to cap all pensions at $90,000.
In Ontario we have seen the are over 53,000 public sector workers earning over $100,000 a year. Those earning over $130,000 will get pensions in excess of $100,000 per year.  This is still a pension worth $1.6 Million.

Pension spiking 
He wants to prevent workers from temporarily jumping into more lucrative jobs and collecting a boosted pension based on the increased salaries. This can happen because in the public sector pensions are based on a final 3 or 5 year average salary. The standard in the private sector is for a pension based on a career average.


Career Average Pensions 
He proposes calculating a pension over a worker’s career, rather than the top three salary years.Most government pensions are based on the final 3 or 5 years of salary.

Of course Charlie will have a tough go from the largest voting block, public servants. However, he is popular with taxpaying voters and is getting Record Amounts of Contributions for his campaign.

New York gets to work on Pension Reform

Governments all over the world are melting down due to the high costs of public sector pensions.

In New York City the Mayor , Micheal Bloomberg has been aware of the pension crisis for some time. Mayor Warns on Pension Costs . He warned of the impending bankruptcy of the city if nothing was done.
Now the Governor of New York has come out in favor of the changes needed to save the system from complete meltdown. He was working in conjunction with the Mayor. New York governor urges overhaul of state pension system.

Today in the State passed legislation that will be felt across the country. California and New York are both bell weather states for major public sector initiatives. The Terminator, despite his reputation, has yet to step up to the public sector unions. He may be forced to now.

State passes landmark pension reform
Some of the provisions of the pension reform include raising the minimum age, and Pension Boosting or Spiking

This legislation is the start of a trend that will roll across as the country as taxpayers are angered at footing the bill for public sector gold-plated pensions.

Sweet Frosting

This week I read an interesting article about California public sector pensions. The article is called Frosting on an already-sweet pension deal. This article highlights that public sector pensions, already a sweet deal can be gamed to make them even better. 

Moving on up
Pensions in the public sector are based on a final earnings scheme. This means that the pension income is based on earnings at the time of retirement.

Most public employees have seen that as they continue their careers their compensation is constantly increasing. Compensation increases through annual negotiated salary adjustments and by the moving into a higher job classification. I highlighted these moves in a recent blog called Winning the Pension Lottery. 

There is huge value in moving up the compensation ladder. 

Although there has been a lot of discussion about the number of pension in Canada, public sector pensions are much different from private sector ones. In the private sector very few defined benefit plans would be based on a final 3 or 5 years annual salary. As well they come far short of offering 70% replacement income. Most private sector plans have limits on the top end and would base the pension over a career average salary. 

More vacation, bigger retirement
We saw the huge liability that exists at the City of Toronto for sick-leave.    
This bank is estimated to be around $450 Million. Are these payouts included in the final pension numbers for retiring city workers? City owes $450M extra in sick leave.

Golden handshakes 
Golden handshakes are common features in Canadian public service. McMaster president's contract revealed. Many of these are negotiated going into the deal. 

Why are these golden handshakes paid in addition to compensation levels and pension afforded to few in the private sector? Financial crisis in the university sector? What crisis? 

DROP-kicking taxpayers  
A more common term for this known as double-dipping. It is the ability to receive a public sector pension and then return to working with no loss of pension income. 

In one case in Hamilton Former city manager appointed JP a city employee retired with a final income of $158,216.14 and is probably earning a pension worth in excess of $100,000. The new job will give him an income worth up to $150,000 per year in addition to the pension.

The media in the US follows these cases closely. However, the Canadian media has paid little attention.  Uncovering these cases is aided by the Pension sunshine lists that are becoming popular in the US. They show government pensioners earning in excess of $100,000 a year in pensions. These lists exist in Boston and California.

Airheads for "air time"
This is a common feature of most public sector pensions.It is simply a way of boosting pensions for retirees. This certainly is something not afforded to private sector pensioners. Pension Buybacks 

The Final Say 
In this article the relevant question that is asked is are:

plans are designed purely for the benefit of the workers and are not designed for what's best for the public.

Getting the Numbers Straight

There is a wide commentary on pension reform in Canada.

One report says that the catalyst for the interest in pension is based on the protest by Nortel workers last week in Ottawa. The article called Canada's pension system is in play cited 4,000 protesters in Ottawa to protest the bad deal the Nortel pensioners are getting.

All levels of government responded with comments about the pension system and how to save it. Flaherty tackles pension shortfall As well all of the current pension reform proposals in Canada were revisited in the press. One of the best recaps of the pensions reforms in front of Canadians was put together by Monica Townson. The report makes for an excellent read.

Also last week the Globe and Mail ran a great series called Retirement Lost.

Bitter Victory

When I started this blog there were very few comments about the coming pension crisis in Canada. Many of the early reports I posted were newslinks from around the world. These reports detailed the plight that was about to descend on pensions in Canada. Very few reports were in the Canadian press.

This leaves me pondering where my blog will take me now that pensions are a front page news item every day.

One area that I see as lacking in the Canadian press is a complete understanding of the numbers of pensions.

Although this blog is called Fair Pensions For All, most Canadians will never have a pension. We all will at one point want to retire. The focus of the debate needs to move from pensions to retirement savings. It is too bad there is not a good single word term for retirement savings in the same way there is for pensions.

The Real Numbers
Most Canadian are not part of any pension fund and never will be. In fact only a small portion of Canadian are members of pension plans and very few are members of gold-plated plans.

Joe Meyer was actively posting in the comments section of the Globe and Mail pension series. He has a good understanding of the issues around the subject. What is your professional background Joe?

Joe focused in one of his posts on actual pension numbers in Canada. Statscan produced a series that looked in depth into pensions. Pension coverage in Canada

We know that in October there were 14,091,000 employees in Canada. Of employees in Canada 3,433,000 or 24% work for the government. Most government workers have the gold-plated pensions known as final salary pensions. Statscan shows 82% are covered with mainly final salary plans (defined benefit pensions or DB).

Statscan shows there are a total of 4,538,192 workers covered under DB plans. Of these 1,900,360 are in the private sector. So, 17% of the private sector has DB plans.Most of these would not be gold-plated.

Gold-plated pensions are based on the past 3 or 5 years of working income. Most plans in the private sector have much lower income replacement targets and much longer average earnings periods. For example, a public sector pensions is targeted to replace 70% of final 3 years working salary. In the private sector it may be 50% or 60% of total career earnings.

The other major type of plan in Canada is called a defined contribution plan. These plans cover less than one million Canadians.

So it is disappointing to see all levels of government talking about DB pension issues. These plans cover only a very small portion of the population. Lets expand our focus to Fair Retirement for all Canadians. Most Canadians have no Pension Pot at all.

Winning the Pension Lottery

Please note: The figures quoted in this Blog are based on current actuarial estimates for full pension eligibility. There may be factors that will create minor changes to any individual's actual final numbers.

New President at McMaster University.

This position is a very important role. It is important because universities are one of the foundations of our Canadian society. One of the keys to our future. The new President is an excellent choice, a man who has shown a dedication to his profession over his lifetime. 

How much is this position worth financially to the person who holds it?
U of C president denies 'lack of transparency' on $4.75 million pension payout

The current outgoing McMaster President has a pension worth a pension about $5.4 million. The new incoming President should expect no less and in five years will have a pension valued at this much. In the meantime he will get an annual salary of around $500,000.

McMaster president's contract revealed

Today the incoming McMaster President has a pension valued at $3.1 million. The next 5 years will, conservatively, bring a windfall of $2.9 million into his pension. This is on top of the $500,000 taxpayers will pay him.

In my calculation his compensation, including pension contributions, over the next 5 years is worth over $1,000,000 per year. His salary will be half of that and the other half is a pension increasing at $500,000 per year. However, over that time the taxpayers will be told, a shown in the Sunshine List, he is only receiving $500,000 per year.

Public sector bonuses must be more transparent

This calculation of his value is quite conservative because he will merit additional increases every year. In fact the current President saw his income rise from $305,000 in 2005 to $524,000 last year. This increase since 2005 added $2.4 million onto his pension value.

Based on 15% annual increases the current President received, the increases of the incoming President should bring his pension over $10 million.

Not bad pay for the next 5 years?

Paying the consequences - Big Debt Brag

The Canadian Taxpayers Federation released a report about the consequences we will have to pay for the action of our governments today.
Big Debt Brag? Canada's Debt 22nd Worst in OECD! Kevin Gaudet wrote and excellent piece that should be a wake-up call for all governments. Lets hope they listen.
There are many implications of the actions our government are taking today. Here is one perspective called World faces crisis over taxation

The Lid Blows OFF in Alberta

Over the past couple of weeks in Alberta there have been several new reports on the compensation packages of senior government officials.

The compensation levels for many public sector employees at the top have been skyrocketing. As in all Canadian provinces the biggest spending areas in Alberta are Healthcare taking 36% of the provincial budget and Education using 26% of the budget.

It is in these areas that Alberta had trouble controlling spending on employee compensation.

Last week we spoke about a $4.57 Million package that was given to the President of the University of Calgary after 9 years of employment. The President was just the leader of the posse that collected a huge increase in compensation over the past few years.

Although these headlines appear alarming they are just the tip of an iceberg. The annual salary costs pale in comparison to the pension compensation that is created by these huge increases in salaries.

It is not only in the education sector that Alberta senior servant compensation is out of whack. There are troubles in healthcare and right across the civil service.

The Tip of the Iceberg
In order to explain the real costs let me share an email I got last week from my friend and pension expert Leo Kolivakis from the Pension Pulse

For a male age 65 in 2009 with an annual Retirement Pension of $70,000 indexed at 2.5% with a 60% survivor component the present values are:

(1) using a discount rate of 5% : $1,254,426
(2) using a discount rate of 6% : $1,131,461

Both scenarios assumes that the pension payment occurs on January 1st of the given year. Mortality follows male mortality as assumed under the 23rd CPP Actuarial Report.

This refers to the cash value of a defined benefit pension. The present value refers to the amount of money that is required to be in the pension plan for a typical government gold-plated pension plan.

For a defined benefit pension plan a cash value of 16 to 18 times the annual pension payments is required.

So What
This shows clearly what happened in the case of the U OF Calgary pension. The President was earning $440,000 and was entitled to a 70% or $308,000 per year pension. In order to fund this he needed a pension cash value of $4.9 million, which the taxpayers happily provided. The Calgary Herald reported $4.75 million. 

The President earned his pension cash value over a 9 year period. That was an average into his pension plan of $544,000 per year. More than his annual salary. Yet his compensation was "officially" only his salary.

Most senior government executives have set-up specially protected plan in their own names. They call them Supplementary Pensions Plans. Check you local government's annual reports and likely you will see one of these listed. It is for any government official making more than the annual CRA (Revenue Canada) allowance for pension contributions. Yes they have made special rules for themselves!

Annual compensation increases are the killer because every increase gets amplified in the pension by 16 times.The taxpayer has to pay for both. It is a misrepresentation of the true compensation of these employees. Yet all of the pension contribution is a tax-free payment to a government employee. You and I would have to a pay tax on the portion of pension contribution received over and above our annual RRSP limit.

The Lid Blows Off!
In the article today about the Premier of Alberta's office staff we saw huge increased last year.

Lets look at one situation the Premier's Chief of Staff. His salary last year was $253,000. If it was up 16% last year it was $218,000. This is an increase of $35,000.

The cash value of his pension is another matter. Remember that the pension is 70% of final average salary. Last year the cash value required for his pension was $2.4 Million. With his salary increase the cost of his new pension is $2.83 million. That is an increase of $430,000.

Here is a good video of a similar situation earlier this year in Vancouver. Vancouver's CFO gets gold-plated pay package

More reports on the disaster in Alberta
Auditor general questions hefty salaries, severance for senior executives
Government 'restraint': Do as I say, Not as I do
Alberta pays out $44M in bonuses
Public Soundsoff

The Pension Crusades

Activity has started up on the pension front as the fall begins. The summer was a little slower as everyone took a well needed break from what had happened in the economy over the past year.

Last week on a personal level there were some successes in the pension crusade and some disappointments.

A colleague and mentor of mine, Paul Holmes congratulated me on a article in the professional association magazine Forum. I was surprised as I was not aware of the article.

Forum is the official publication of Advocis, the Association for Life Insurance Financial Advisors. The Editor's article was a called The Haves and Have-Nots. It spoke about the pension dilemma.

There are already rumblings about the fairness of the system that rewards a certain class of workers with defined benefit pension schemes linked directly to salaries. One person leading the crusade to address the gap between the retirement haves and have-nots is Bill Tufts, a Hamilton-based pension specialist with WB Benefit Solutions.

On his blog he calls public sector pensions "the biggest economic issue in 2009". Tufts is calling for increased transparency of public sector pension plans and pushing the notion of a supplemental pension plan for private workers.

It was nice to be recognized in the industry I have worked for the past 15 years. However, the part about supplemental pensions was not quite accurate. I don't know how we as a society can afford them with the high tax rates we have as a country. The association had come from the Globe and Mail article with Roy McGregor, where I mentioned them as one option available.

It is too bad there is not a link to the whole article on line but the magazine is a professional association publication. You can access the site of Advocis and check out their recommendation for pensions in Canada. It is Encouraging Small and Medium Sized Firms To Participate in Pension Plans

One disappointment of the week was the reporting on the University of Calgary President's pension. U of C to pay Weingarten $4.75M pension

Unfortunately the reporter for GlobalTV in Calgary who wrote the script for a TV newsclip had a very limit background on financial matters. She could not believe that the $4.75 Million paid to the President was based on 70% of his salary. We did not know his salary but I have a rule of thumb for estimating the cash value of pensions. An annual final salary pension has an equivalent cash value worth 16 times the annual pension.

In the case of the President I had estimated that the pension was worth $300,000 per year. We did not know right away but found out later that his current salary is $441,000. A pension at 70% of this would be $308,000 per year. Gross this up 16 times and you need a pension cash value of $4.9 million. Pretty close to the original amount quoted.

The reporters challenge was that over 30 years a $300,000 pension would pay out more than $9,000,000. This is correct however, the pension still is estimated to earn 5% per year and the payout is calculated for Cost of Living about 2.5%. Try running the calculation on a spreadsheet for 30 years. You will see there is still almost $400,000 left but don't forget about the surviving spouse.

The disappointment was the reporter had not covered pensions before. She found it difficult to grasp the concepts involved. Therefore she resorted to interviewing the official spokesperson at the University and other with vested interests. They too were collecting taxpayer funded pensions. Note the one comment about the $50,000 annual pension. Gross this up by 16 times and it is worth $800,000.
The Global TV Newsclip can be seen here at 39 minutes.

Oh well... win some lose some... It was a good experience fo me trying to clarify this muddy issue.

This only reinforces the purpose of this blog. That is to inform the public, public policy influencers and the media about how these pensions really work.

The High Cost of Government

In the Vancouver Sun today there was an article today from Veldhuis at the Fraser Institute. He notes that in BC the Finance Minister pointed out in a speech, "provincial health spending has risen by 45 per cent" since 2002. And that there was a 4.9-per-cent increase over last year's total spending of $38.3 billion.

What is the highest single expense of all BC government organizations?
Compensation costs. (Wages, benefits and pensions)

At most government organizations the compensation package is well in excess of 50% of total expenses. At hospitals in BC it is 75% of total costs and at University of British Columbia it is 60% and I could not find school boards but in Ontario it is usually 75%.

The increases last year in these packages were enough to drive the total increase in government spending. For example, the compensation costs at UBC increased 8%. Work out the total rise in spending if the largest expense at 60% (compensation) goes up 8% and everything else stays the same. What will be the total increase?

The annual compensation costs for The Fraser Health system rose 7.8% last year and 7.5% the year before.

In the most recent budget there is about $30.1Billion available for discretionary spending. BC Budget and Fiscal Plan PDF The three top spending areas from page 11 are:

Health Services -......... $14.1Billion - 46%
Education -................. $ 5.1B - 17%
Advanced Education ....$ 2.1B - 7%

Compensation increases are why spending goes up every year with no perceptible increase in services. If these compensation packages were bench-marked to the private sector they would actually fall substantially. The CFIB estimates compensation costs would fall 19% in education and almost 25% in healthcare.

Here is why the wheels are falling off.
Vancouver's CFO gets gold-plated pay package
A brief retirement in West Vancouver

PS - Whenever I need a good laugh I always go to the BC Pension website. There is a series of short videos about the BC defined Benefit Pensions plan. They are outrageous and funny at the same time. Like a bad late night Infomercial. BC Pension Videos
 

Supplementary Plans and Pension Shortfalls in Alberta

Alberta and the rest of the Western Premiers are Pushing for new Pension Plan

It is a great idea but how will it be funded?

The Fraser Institute figures that already we work more than 5 months before we start to save money for ourselves. How can we save more money for the Supplementary Plan?
Fraser Tax Freedom Day Video

As a self-employed individual I pay into the CPP (Canada Pension Plan)at the rate of 9.9% of my income, up to the YMPE. It provides me with a replacement of 25% of the YMPE.

Where can I come up with more money to pump into a government run pension plan? The only way is to reduce the taxes I pay every year. This would leave me more money to fund into my personal plan. However, this will never happen because I have several public sector pension plans I need to fund.

In Alberta the public sector pension plans are billions short. This despite the fact that over the past 30 years taxpayers have funded billions into these plans. Alberta's Public Sector Plans Short Billions

The public sector pension plans pay a replacement income of 70% of final salary for life. There are thousands of public sector retirees earning more than $100K per year in pensions. And they pay much less into their pension plans than self employed taxpayers pay into the CPP program.

Great idea lets hope we can make it work.

Pensions battle for profits

Earlier in the week my Pension Socialism blog touch on the large ownership interests that pension have in our country.

One of the threats that I see is the large pools of capital that are being accumulated and invested by public sector pension plans. They love monopoly or oligopoly type investments. Profits are high with a lack of competition .

The type of investment they like include public infrastructure or utility type companies. Many of these have a very high level of entry because of the capital required to build the systems. Think of the monopoly Bell had to build Canada's phone system.

In the next few years many of these monopolies will be moving into the hand of Canada's public sector pensions.

The Ontario Teachers plan was very eager to get Bell Canada last year. Telecommunication in Canada is a very restricted industry with huge profits for its players. Any encroachment in those industries will affect profitability. The cost of monopoly in Canada

It was interesting to see how the telecommunications industry oligopoly is protecting its interests. A Globe and Mail article cited this information:

Rogers Communications Inc., Canada's biggest wireless company, has asked the federal regulator to conduct intensive public reviews of two new entrants to the marketplace.

Rogers, as well as Telus Corp. and BCE Inc.'s Bell Canada, have won third-party status at the CRTC hearings Sept. 23 and 24 to determine Globalive's future. They are arguing that the Toronto-based company, which has received its financial backing from Egyptian telecom giant Orascom Telecom Holding SAE, does not meet foreign ownership and control rules.

And of course cut dramatically into profits. The door must be closed to competition at all costs!

The decision and recommendations on this policy will be made by bureaucrats who happen to be members of a pensions fund that just happens to own major shares in all of Canada's telecommunication companies.

What do you think the decision will be. It is a foregone conclusion.

The Socialism of Pension Funds

Some of my earliest research into pension funds led me to the writings of Peter Drucker. He envisioned in the 1970's that a move towards power in the hands of the worker through their ownership of the means of production. This ownership would be controlled by worker's pensions.

The 1970's were the beginning of large scale funding into pension plans. For example, most of the $100Billion accumulated into Ontario's Teachers Pension was saved over the past 30 years. The CPP Canada Pension Fund has accumulated over $100 Billion in a very short time.

Socialism is occurring in most developed economies around the world. It is occurring through pension funds.

Socialism refers to various theories of economic organization advocating state, worker or public ownership and administration of the means of production and allocation of resources... Contrary to popular belief, socialism is not a political system; it is an economic system distinct from capitalism

Wikipedia

Long Term Implications
What will be the long term implications for capital markets and hence the means of production of the world being controlled by pension funds?

Some estimates place the total market value of the TSX at around $1.2 trillion. In Canada pension plans own a very substantial portion of those assets. The Economist

The major Canadian pension plans are owned and controlled by public sector unions. The Ontario Teachers for example, owns the a major portion of commercial property in Canada. As well they love monopoly and infrastructure industries where profits are in the range of 20% to 25% every year.

Political Implications
What will be the long term political implications?

The influence of pension funds around the world is going to have major implications on political policies. What is the impact of public sector unions controlling through pension funds most of a country's wealth?

Public sector unions are have very strong political views and the investments that they control will have major political influence. The public sector unions(CUPE) has very strong vies and opinions on several major social and political issues.For exampe the web site of CUPE speaks out on many issues:

Trade - Foreign policy
Mandatory retirement
World Bank
NAFTA
Social services
Racism
Poverty
Highways - Toll roads

These are all important issues. However, I am not sure that the public sector union view is always the best solutions for many of the problems facing our country.

Political Impotence
For some time I have had the view that the politicians in this country have less impact on government workings and policies than the union bureaucracy. Now the bureaucracy now has the economic levers as well.

Despite the rhetoric the public sector unions do not always represent the best interest of the Canadian public. In a fight over what is best for society and what is best for the unions, the unions always side with members.

We have the situation that the long term government policies are set and impacted by government union members.

When it comes to making decisions will the unions do what is best for Canada or what is best for their pension funds? One example of this is the 407 Highway in Toronto. It is one of the most expensive highways in the world.

Is the pricing on this road based on what is best for the economic movement of goods around the metro area or what is in the profit interests of the pension plans that own the 407?

Beaten at Our Own Game
As we see the rise in Pension Socialism in the western world we are at risk of being overtaken by the BRIC (Brazil, Russia, India, China) countries. With the rise of the middle class in these countries the rise of capital will be staggering.

The Wall Street Journal today reports that Pension Funds in Asia Passed Europe's in 2008. What will happen as more and more the workers in these countries begin to accumulated capital into pension funds? China starts pension plan trial for 800 mln farmers
These pensions funds will want to start to invest in the popular investments of pensions funds:

Infastructure

Real Estate

Commodities

There will be many very interesting developments to come in the years ahead.

Unions have the spotlight for Labour Day

Labour Day is a good time to remember the workers in our society who are the backbone of Canada. There have been many songs dedicated to the average on the street worker.

We like to think of labour as the type of worker personified in the Garth Brooks song - American Honky Tonk Bar

Although this type of image works well for the union movement in Canada it is far from the reality of their membership. Most unions in Canada are public sector unions. These unions receive compensation packages far and above the average Canadian. Most will retire with platinum pensions valued close to $1 Million and health care benefits most North Americans can only dream of. All funded by you as a taxpayer!

This all makes for great rhetoric. The Labour Day message of the OFL states that

Don’t try to tell one of the 222,000 Ontarians who lost their job in the past year that this recession is over.

How many government workers do you know that lost a job last year?

And don't try to tell those seniors who have seen their pensions evaporate.

How many public sector workers saw their pensions reduced?

There is no recovery until there is a jobs recovery. There is no recovery until those who cannot find work are able to draw from the EI program that they helped fund. There is no recovery until pensions are secured and our seniors can enjoy their retirement years in comfort and dignity.

Lets all get government jobs and there will be no worries!

I guess maybe in addition to pension envy I am suffering from union envy. Bill's pension envy

The Toronto Star ran an article about the changeover of the leadership of the CUPE and OFL.
The article points out:

The CAW, Canada's largest private sector union, has not been affiliated with the OFL since 2000

The membership of the OFL is almost exclusively government workers.

The public sector in Canada employees almost 3.4 million or 24% of all employees in Canada. Statscan points out there are 4.5 million unions members in Canada. It would seem that all but about 1.1 million union members in Canada work for the public sector.

One interesting blog was posted about the changing leadership at the OFL. It is from Canada Free Press

Pension changes ahead this fall

The climate is ripe for changes in pensions in Canada and throughout the developed world. This fall numerous government and public policy groups will be examining, dissecting and discussing pension reform.

Leo at the Pension Pulse reported on a BBC report about the Labour party proposing limits to the amount of pensions that public sector employees can get. Like most governments the bottomless pot is starting to run out. The same applies here in Canada as we look at how we will fund a multi-billion dollar pension and benefits shortfall for public sector workers.

The CD Howe estimates the shortfall in the public sector pensions and benefits in excess of $400 Billion. That is a lot of future tax dollars that Canadians will have to cough up. Will they be willing to cough or will they demand changes? Margaret Wente

I think that we should implement at Sunshine List of public sector pensions. Public Sector Pension Club

At the same time the coming discussions on pensions will hopefully uncover some of the abuses to taxpayers that exist. These include the multi-million dollar entitlements of some public sector employees, double dipping, pensions without sufficient contributions and the early retirement provisions of public sector workers.

There are some in our society that need to be protected. A recent article in the Toronto Star highlighted the risk of women in poverty in Canada. There is a risk for many more in our society to fall behind in the coming years. The next high risk group is seniors. Seniors poverty

All we can ask for is a fair system whereby the public sector gets the same type of entitlements afforded to average taxpayers.

The public sector is not entitled to their entitlements. Especially at the risk of others in society and certainly not at the taxpayer's expense.

B.C. throne speech signals public sector instability

It is always interesting to watch the press releases from one of Canada's major unions, the NUPGE. Despite the current economic times they steadfastly refuse to sacrifice for the economic well being of Canada.

The most recent comment from the NUPGE (National Union of Public and General Employees) is called B.C. throne speech signals public sector instability. It is a very well thought out article trying to address some major issues in Canada today.

The union wants to support a wide range of public initiatives:

in legal aid, libraries, literacy programs, student aid, housing, seniors' services and mental health and addictions services.

Despite the rhetoric for its support of these initiatives, the union refuse to offer any productive solutions. They are trying to incite fear that these programs will be cut because of a public sector wage freeze.

The simple solution would be to compensate the unions at the same level as the taxpayers in the private sector. The total compensation package of the public sector includes wages, benefits, and pensions. Public servants in Canada are paid up to 40% more than the same private sector worker.

For most MUSH organizations, municipalities, universities, schools and hospitals the single largest expense is for the compensation package of union employees. At most municipalities it is in the range of 50% of revenue and rises over 75% for most school boards. Hospitals and Universities fall somewhere in between.

By moving the public sector pensions and compensation to the same level as those in the private BC could save billions in its budget costs. Today PricewaterhouseCoopers calculated the public sector pension to be valued at 35% of wages. Public sector pensions in the UK. Canada and the US are paid at roughly the same level. They are defined benefit plans based on achieving 70% of final salary.

A complete report of the premium paid to workers in the private sector was published by the CFIB (Canadian Federation of Independent Business). It is in a PDF report called Wage Watch.

The goals and ideals of NUPGE seem right on target. However, their appearance is that of only wanting to protect the gold-plated benefits and platinum pensions of their members. All of course funded by the taxpayer.


Excellent BBC coverage of the Pension Crisis
Pensions in the UK Canada and the US are based on the same type of pension plan design. Defined benefit plans attempting to pay retirees at least 70% of their final salary at retirement.

The Double Dip Party Continues

A news article caught my attention today. Pension + Salary — how’s that for a “retention bonus”?

It is an issue that is rising is concern across the US. My hope is that it will soon be addressed in Canada as well. My recent blog called Canada promotes double dipping covered the basics of the issue.

If you see any Canadian articles about double dipping, please let me know.

Some NY lawmakers collect pension pay and salaries
State Legislators Double-Dip Salaries, Pensions; Lone Holdout Honored
In Utah - Double dippers adding to the pension fund problem?

USA Today - Our view on ‘double dipping’: Public sector ‘retirees’ draw a pension — and a paycheck
Auditor: 'Double dipping' costs Del. $17M a year
Florida limits 'double-dipping' for state workers

There are a few groups that are fighting for taxpayers to make sure that government stay accountable to the taxpayer.

One of the groups that I respect is the Canadian Taxpayers Federation. Occasionally they bring an interesting pension situation to my attention.

A pension they brought to my attention is the Saskatchewan Healthcare Employees Pension Plan or SHEPP. It is a a typical mid sized pension plan in Canada. Funded by taxpayers for the benefit of public sector employees.

It is the kind of plan all Canadians would like to have.
Pension Envy

A total of 65 healthcare employers in Saskatchewan participate in SHEPP on behalf of their employees.

The plan serves 43,729 members. Of these 32,287 are in active service and 10,018 are retired and the remainder have a deferred pension

Total assets in the plan at the end of 2008 were just under $2.5 Billion

Total contributions into the plan 2008 were $163 million.
Last year the employees contributed $75.514 M while the employers contributed $84.464 M or 112% of the employee contribution

There was $117 million in total benefits paid out in 2008

The plan lost 19.8% on its investment portfolio last year.

The total plan assets fell by $562 million in 2008

The employee contributions into the plan are 5.85% of earnings up to the YMPE ($46,300) and the contributions on income over YMPE are 7.53%

The employer (taxpayer) contributions are set at 112% of employee contributions or 6.55%

A total of 65 public healthcare employers mainly hospitals in Saskatchewan participate in SHEPP on behalf of their employees.

Like most of these pension plans there is no representation from the taxpayers who fund them. They have a list of trustees who are “employer” and “employee” representatives. However, even the employer representatives appear to be members of the pension plan.

When difficulties arise with these plans the funding problems are usually discussed with the government behind closed doors. The government does not like to create friction with its largest voter block. Pensions usually get what they want from the politicians negotiating with your money.

There needs to be taxpayer watchdogs on the boards of these pension plans. They are funded by taxpayers and taxpayers have to kick in any pension shortfalls.

The average wage in the health care sector in Saskatchewan is $46,742 per year. The average pension from SHEPP is based on a 2% per year with maximum pension at 35 years. This means a benefit of close to 70% of retiring income or $32,719 including CPP.

Of this pension of $32,719 the CPP would contribute $10,905 and the pension plan contributes about $ 21,814.

The big question is …
An private sector employee pays 4.95% of annual income into the CPP plan to get $10,905 per year in pension income.

The public sector employee in SHEPP pays 5.58% to get $21,814. How can the public sector employee pay in the same and receive twice as much in taxpayer funded pension?

Canada is addressing pension reform at all levels of government. Fairness between the public sector and public sector pensions is one the key issues that needs to be addressed.

Union Dust up!

Unions have taken advantage of poor economic times to strong arm governments into luxurious settlements. It is a strategy that may have been misdirected. Especially as we are just around the corner from a major pension war.

Recently the NUPGE The National Union of PUBLIC and General Workers published an article complaining about the treatment of unions in Canada's media.

"Over the past couple of months, it’s been one offensive, union-bashing column or editorial after another,"

"Perhaps I missed something while taking some time off with family earlier this summer. How did 800,000 hard-working unionists in this province suddenly become such a drag on the economy?"

"Nor are they keen to publish stories on the successful negotiation of new and improved collective agreements for some 90,000 public sector workers in OPSEU over the past 12 months - without one strike.

NUPGE may be right about the press coverage that they have been receiving but they misunderstand the reasons for it.

The Toronto Star reported on unions in an article called Myths and reality of the union movement. The article cited a few myths that the unions live by.

unions do not represent the entire working world. They are only interested in defending the wages and benefits of their members, most of the time at the expense of other, non-unionized, workers.

even though they may claim to support the interests of children, students or patients, in reality there always is a demand for better wages or benefits behind almost every dispute.

they live in isolation. Most of the time, their demands are made with no consideration for the conditions of other workers in the same country, not to mention the reality in other parts of the world.

The unions cannot understand the anger that is directed at them?

The unions are the ones who began the battle and it will be them that have to end the battle. Even those who are sympathetic to the unions and understand them think they have gone overboard. One of these articles includes the Globe and Mail editorial called Get down to the strike 'essentials'

In reality the fight is public sector unions against the taxpayer. I wrote about this last month in my Canada's Public Sector Unions at War with Canadian Taxpayers

California Pension Dust Up!

Last week I wrote Pension Reform In California about pensions reform in California. What happens in California will have an impact on pensions across North America.

On Thursday in the Los Angeles Times there was an article called Why did Schwarzenegger bail on pension reform? The article speaks about Schwarzenegger backing out of a commitment he made to reforming pensions in California.

In the LA Times article, two advocates for pension reform address the issue. The first is an analyst with American Federation of State, County and Municipal Employees. The secound perspective is countered by the head of California Foundation for Fiscal Responsibility. The article makes for interesting reading.

On Friday there was a follow-up article called CalPERS: a looming disaster? This article once again features the perspective on the two sides in the previous article. It addresses the huge shortfalls of Calpers, the largest California public sector pension fund.

Almost all public sector employees defined benefit pensions are suffering serious shortfalls and are perceived to be overly generous.

The articles together do a good job of describing in a comprehensive way the main issues surrounding pension reform. Pensions reform is coming to North America and the battle is on to see what it will look like in its final form.

One interesting note to keep in mind when you read these articles is that Calpers covers 1.6 million members and has accumulated $191Billion. In Ontario the biggest pension plan is Ontario Teachers and at the end of last year they had over $110 Billion but only had 284,000 members. Calculate the average amount of assets per member for each plan. You will see how generous Ontario taxpayers have been funding public sector pensions.

Dig deep and keep working there is lots more to pay!

Canada promotes double dipping when most governments are eliminating it!

As the slogan for Red Rose tea says... Only in Canada Eh!

Jonathan Chevreau of the Wealthy Boomer and the National Post recently created a video that described how the Canadian government promoted double-dipping to Canadian public sector employees. Phased retirement video

This is a scheme that was hatched in the federal budget in 2007. There was not much discussion about the deal at the time. With the new environment in pensions it has highlighted the huge gap between public sector pensions and the average Canadian retiree. The idea was originally designed to help companies deal with labor shortages. Of course the bureaucrats who wrote it made sure that there was something in it for themselves. Phased retirement article

It was an issue that I had written about before in a previous article Double-Dipping. Imagine getting your gold-plated pension at age 50 and then government telling you they want to have you back at your old job... at full pay. With the elimination of mandatory retirement we will see public sector employees eligible for 2 gold-plated pensions.

I have been advocating for pensions disclosure similar to the Sunshine List in Ontario and B.C. There is one in California that lists those pensioners earning over $100,000 per year. We need one in Canada to list those who have excessive pensions in Canada. They were after all negotiated between them and the taxpayer. the only problem was that during the negotiations the taxpayers had no-one to represent them.

Most government in North America are looking for ways to eliminate double-dipping and Canada wants to promote it.
In Arkansas - State legislator puts spotlight on ‘double dipping’ county officials
Ohio needs to rein in double-dipping by public officials
Double Dipping in Florida
Upset in Delaware about double-dipping